Thursday, July 29, 2010

The Flow Pigou Effect.

This is what Paul Krugman has been saying for some time, but now from some official types at the Fed. It doesn't really seem that they have the instruments to stem the tide. We need a public works program. The ordinary Pigou Effect says that with a drop in the price level real financial wealth has increased so spending should rise on its own accord. The flow effect, however, predicts the opposite. If deflation is expected to persist, there are gains to be had by hoarding cash. That becomes self-fulfilling.